Global liquidity trap

Vol: 
04/2013
Author name: 
Ippei Fujiwara, Tomoyuki Nakajima, Nao Sudo, Yuki Teranishi
Year: 
2013
Month: 
May
Abstract: 

How should monetary policy respond to a global liquidity trap, where the two countries may fall into a liquidity trap simultaneously? Using a two-country New Open Economy Macroeconomics model, we first characterise optimal monetary policy, and show that the optimal rate of inflation in one country is affected by whether or not the other country is in a liquidity trap. We next examine how well the optimal monetary policy is approximated by relatively simple monetary policy rules. The interest-rate rule targeting the producer price index performs very well in this respect.

Publication file: 

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